August 6th, 2011
The advantages of owning your own business are obvious but so too are the risks.
A franchisee is taking less of a risk than starting his or her own business because they are operating under an established and proven business model and supplying or producing a tested brand name.
Franchising is essentially the permission given by one person, the franchisor, to another person, the franchisee, to use the franchisor’s name, trade marks and business system in return for an initial payment and further regular payments.
Each business outlet is owned and managed by the franchisee. However, the franchisor retains control over the way in which products and services are marketed and sold, and controls the quality and standards of the business.
1 it is your own business
2 someone else has already had the bright idea and tested it too
3 there will often be a familiar brand name which should have existing customer loyalty
4 there may be a national advertising campaign
5 some franchisors offer training in selling and other business skills
6 some franchisors may be able to help secure funding for your investment as well as discounted bulk buy supplies.
1 it is not always easy to evaluate the quality of a franchise especially if it is relatively new
2 extensive enquiries may be required to ensure a franchise is strong
3 part of your annual profits will have to be paid to the franchisor by way of fee
4 the rights of the franchisor, for example to inspect your premises and records and dictate certain methods of operation, may seem restrictive
5 should the franchisor fail to maintain the brand name or meet other commitments there may be very little you can do about it.
The franchisor receives an initial fee from the franchisee together with on-going management service fees. These will be based on a percentage of annual turnover or mark-ups on supplies and can vary enormously from business to business. In return, the franchisor has an obligation to support the franchise network with training, product development, advertising, promotional activities and a specialist range of management services.
Raising money to finance the purchase of a franchise is just like raising money to start any business. All of the major banks have specialist franchise departments. You may need to watch out for hidden costs of financing. These could arise if the franchisor obtains a commission on introducing you to a business providing finance or a leasing company for example. Of course these only represent true costs if you could have obtained the finance cheaper elsewhere.
Choosing a Franchise
There are many factors you may need to take into account when choosing a franchise. Consider the following:
1 your own strengths and weaknesses – make sure they are compatible with the franchise
2 thoroughly investigate the business you are planning to buy
3 research the local competition and make sure there is room for your business
4 give legal contracts careful consideration
5 last but not least, talk to us about the financial projections for the business – cash flow, working capital needs and profit projections will form the core of your business plan.
The contract will form the basis of all franchise agreements. It should ensure that you run your business along the lines set out by the franchisor. The following areas should be covered:
1 the name and nature of the business
2 the geographical territory where the franchisee can use the name
3 how long the franchise will run
4 the fees (both initial and on-going) that will be charged
5 what happens if the franchisee wants to sell or either the franchisee or franchisor want to end the agreement
6 the terms of the relationship, specifically that the franchisor will provide training, advertising etc and that the franchisee will abide by the rules laid down by the franchisor.
July 28th, 2011
Shares in a company represent ownership. When an individual buys shares in a company, they become one of the owners of the business. This entitles them to a share of the profits of the company – the dividends.
What are shares and why are they issued?
When an individual buys shares in your company, they become one of its owners.
Small companies issue shares in their company in return for a lump sum investment. This investment may either come from friends and family or, for businesses that are looking for capital to fund high growth, through formal equity funding finance.
These investors are willing to put up capital for a share in a growth business. The advantage of raising money in this way is that you don’t have to pay the money back or pay interest to the investors. Instead, shareholders are entitled to a share of the distributable profits of the company, known as dividends.
How are shares issued?
When you set up a company with share capital, you can decide on the level of share capital and the number of shares of a fixed nominal value.
A statement of capital and initial shareholdings must be delivered to Companies House as part of the incorporation of the company and this will set out:
The founders of the company must sign form IN01 and the memorandum of association and state the number of shares they want. These are then issued upon incorporation and are called subscriber shares.
Family or friends
You may choose to issue shares to family or friends in return for making investment in your business, rather than accepting the offer of a loan from them. That way you’re not obliged to make repayments.
It is important to formalise any agreement with family members or friends as this can help you avoid or resolve any disputes that may arise in future.
Employee share ownership schemes offer employees a stake in the business, encouraging loyalty and helping you to retain key staff.
They also provide an incentive or reward for performance and can help recruitment.
A company need not issue all its capital at once. Issued capital is the nominal – rather than actual – value of the part of the share capital that has been issued to shareholders.
For example, a company that issues 500 shares at £1 each has an issued share capital of £500.
A Private limited company only needs to issue one share of any value, but Public limited companies (plcs) must have at least £50,000 worth of issued share capital before they are allowed to trade. Initially they must satisfy this requirement by means of shares in sterling or in euro shares (and not by a combination of the two).
Further shares can be issued in the company by the directors, subject to the rules set out in the Articles of Association, but typically by being authorised to do so by ordinary resolution of the company’s existing members.
An exception to this is that the directors of a private company incorporated under the Companies Act 2006, which will only have one class of shares, do not need any prior authorisation from the company to allot shares.
The directors set the price of these shares.
Limited companies must notify Companies House of any new shares issued.
Types of shares
A company may have many different types of shares that come with different conditions and rights.
There are four main types of shares:
Ordinary shares are standard shares with no special rights or restrictions. They have the potential to give the highest financial gains, but also have the highest risk. Ordinary shareholders are the last to be paid if the company is wound up.
Preference shares typically carry a right that gives the holder preferential treatment when annual dividends are distributed to shareholders. Shares in this category receive a fixed dividend, which means that a shareholder would not benefit from an increase in the business’ profits. However, usually they have rights to their dividend ahead of ordinary shareholders if the business is in trouble. Also, where a business is wound up, they are likely to be repaid the par or nominal value of shares ahead of ordinary shareholders.
Cumulative preference shares give holders the right that, if a dividend cannot be paid one year, it will be carried forward to successive years. Dividends on cumulative preference shares must be paid, despite the earning levels of the business, provided the company has distributable profits.
Redeemable shares come with an agreement that the company can buy them back at a future date – this can be at a fixed date or at the choice of the business. A company cannot issue only redeemable shares.
Transfer of shares
In a private company, shares are usually transferred by private agreement between the seller and buyer, subject to the company’s rules and approval of the directors.
Certain taxes apply when you transfer or sell shares:
If you are transferring shares yourself using a paper stock transfer form Stamp Duty may be payable when the value is over certain limit
Any gains you have made on selling shares may be subject to Capital Gains Tax.
When a shareholder dies or becomes bankrupt, their shares and the rights associated with them must be given to a personal representative or executor.
Paying dividends and paying tax
A dividend is a part of the company’s profits that is given to shareholders.
Small companies often pay dividends after the annual accounts are prepared, or often where directors are also shareholders at regular times during the year.
The dividend is calculated per share, so the more shares you own, the more money you get.
Dividends attract income tax, but not National Insurance charges.
When paying dividends, the company must send a dividend voucher to the shareholder . This shows the amount of the dividend and the amount of tax credit. The tax credit indicates the amount of tax paid by the company on the shareholder’s behalf. Companies can pay dividends electronically if a shareholder agrees to it. Companies no longer need to send a dividend voucher in such cases
Dividends are paid after tax has been deducted at the basic rate. If you pay a higher rate of tax, you may be liable to pay additional tax on your dividend.
Making changes to share capital
Companies can alter their share capital through a number of routes.
Since 1 October 2008 private companies have been able to reduce share capital by means of a special resolution and a statement by the directors confirming the solvency of the company. The procedure is subject to any provision in the company’s articles prohibiting or restricting the reduction of capital. There is a fee of £10 for this procedure.
Issuing shares to a new shareholder
A company can issue shares to a new shareholder by authorising the directors to allot shares. The authority can be in the articles or given by an ordinary or elective resolution.
Allotment creates a right to be issued with the shares.
Changing the shares
A company can consolidate or subdivide its share capital if authorized to do so by the articles.
Consolidation is when the shares are put together and then divided into shares of larger amounts, e.g. 200 shares of £1 are consolidated to create 100 shares of £2.
Subdivision is when shares are divided into smaller amounts.
To consolidate or subdivide shares, a company must pass an ordinary resolution, then send the resolution and a completed form SH02 to Companies House within a month of the change.
July 28th, 2011
Directors owe a duty of care to the company’s creditors. If a company continues to trade when it is insolvent, its directors can be held personally accountable if their actions cause financial loss to any of the company’s creditors.
You will also be liable under any personal guarantees.
What do I do if my company is in financial difficulty?
Directors must use their judgement and known facts to establish whether the company is, or is about to become or is insolvent
They must establish whether or not a problem is only on a short-term basis and will be rectified by trading on, or means terminal failure, or something in the middle ground. Directors must be cautious, they should not do anything (writing cheques, committing the company to any action, paying creditors, taking deposits etc) without seeking professional advice.
In many situations one of the direct or indirect causes of insolvency is management failure. This may be accompanied by a lack of control, poor record keeping and a lack of accurate financial information.
Accurate and up-to-date accounts are vital in determining a company’s solvency.
How do I tell if my company is insolvent?
A company is insolvent on a cash-flow basis if it is unable to pay its debts as they fall due, or fails to satisfy a judgment debt. There is a second balance sheet test for solvency which asks.
The cash-flow test
Many companies will fail the cash-flow test on a short-term basis at some time in their existence. Temporary cash flow problems may be caused by
- The failure of a customer to settle a debt on time.
- Overtrading (having too much cash tied up in stock and debtors).
- As a course of a delay in refinancing.
- Not making the required sales to break even.
- Having to make unscheduled payments.
Short-term cash flow problems can be corrected by trading on or after rearranging overdrafts or loan finance.
The balance-sheet test
Very simply do the business liabilities exceed the business assets, taking into account the value of assets with the company in a distressed financial position and providing for all contingent costs, losses and provisions.
If a company does fail its balance sheet test, the directors must act to protect the interests of its creditors to avoid any allegations being made of wrongful trading under the Insolvency Act.
If the company is insolvent directors should take the following steps:
- Obtain and document professional advice and their actions and responses.
- Ensure that the company’s accounts are up to date with a full list of assets, debtors and creditors
- Consider whether any part of the company is worth saving.
- Discuss whether it will be possible to make a formal or informal arrangement with creditors.
- If the company cannot be saved the directors should put it into liquidation.
The accounts should be prepared on a break-up basis which means the fixed and current assets are valued to their net-realisable value.
To avoid personal liability for their actions when a company is in financial difficulties its directors should be careful not to:
- Dispose of company assets at undervalue.
- Show one creditor preference to the detriment of another.
- Accept customer deposits or payments on account if completion is uncertain.
Most important of all if a company is insolvent directors need a licensed insolvency practitioner